Coin Metrics’ State of the Network: Issue 232

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By: Tanay Ved

The evolution of the Ethereum community in the direction of a Proof-of-Stake (PoS) blockchain has ushered in essential modifications for its key contributors and underlying financial techniques. This transformative shift, sometimes called “changing the wheels of an airplane mid-flight” has now positioned staking as the spine of Ethereum consensus. The profitable completion of “The Merge”, adopted by the “Shapella” improve, has resulted in a complete trade rising round staking. With roughly $40B property staked and a rising ecosystem of stakeholders, it is essential that we perceive the present make-up of this panorama and delve into key gamers wielding notable affect over the trade. 

On this situation of Coin Metrics’ State of the Community, we dive into Lido—the largest participant inside the staking financial system—and perceive the state of its liquid staking token (stETH), governance token (LDO) and underlying node-operator composition. With this evaluation, we search to handle Lido’s prominence in the liquid staking panorama—an more and more contentious subject for the Ethereum neighborhood.

Earlier than we begin diving into the depths of Lido and stETH (staked ETH), nonetheless, it’d be useful to grasp Ethereum staking stands right now—particularly in opposition to the macro-economic backdrop of financial tightening and rising rates of interest. 

Supply: Coin Metrics Formula Builder

As of October, round 27.9M ETH (23% of present provide) or $40B in worth has been staked on the Beacon Chain, highlighting the speedy development of staking since the Shapella hard-fork. Nonetheless, for now, this accelerated adoption appears to have slowed down, as showcased by the emptying validator entry queue. This slowdown can be attributed in the direction of the lower in Ether staking APR from over 5.5% throughout the Merge to three.5% as of October, as a operate of a big quantity validators coming into the community and decrease transaction charges. Compared, the US 10 12 months treasury yield is at the moment at 4.67%, introducing a big alternative price in the creation for safer and better yields. A change in these situations, nonetheless, might result in a shift on this outlook—making on-chain yields engaging as soon as once more. 

Lido performs a big position in the staking financial system, permitting for democratized entry to staking. At its core, the protocol brings collectively capital suppliers (i.e., ETH stakers/delegators) and infrastructure suppliers (i.e., node-operators), permitting customers to deposit any quantity of ETH relatively than the 32 ETH required to be a validator. When a person deposits ETH into Lido’s sensible contract, funds are pooled and outsourced to a curated set of node-operators that run the required software program and {hardware}. In consequence, delegators obtain”‘stETH”— a fungible claim on their ETH deposits minted at a 1:1 ratio. 

Out of the total 27.6M ETH staked, ether staked through Lido is at 8.9M ETH or $16.8B in total value locked, making it the largest liquid staking and decentralized finance (DeFi) protocol. In percentage terms, this equates to about 32% of all ETH staked—a metric that’s been below the highlight as Lido’s market share hovers round one-third of all ETH staked, leading to re-surfacing issues round centralization. 

Supply: Coin Metrics Network Data

The concerns stem from the notion that if a liquid staking protocol, or its underlying node-operators exceed crucial thresholds of complete ETH staked, it may possibly enhance the chance of undesirable outcomes for the Ethereum community as a result of elevated centralization. This could possibly be in the kind of censorship, coordination in maximal extractable worth (MEV) extraction or unfair slashing (penalties), and different kinds of manipulation like time-bandit assaults for the functions of private acquire. Nonetheless, it is essential to notice that Lido doesn’t function as a single entity; as a substitute it’s composed of 38 node operators topic to a most threshold of stake, with servers being distributed geographically to take care of jurisdictional dispersion of the validator set.


Arguably, the governance course of overseen by the Lido DAO (decentralized autonomous group) presents a higher (potential) threat to the protocol than its share of staked ETH. We’ll discover the position of governance in a subsequent part beneath. 

The controversy over Lido’s dominance has amplified not too long ago, with proponents arguing that Lido enhances accessibility to staking, whereas crediting its success to free market dynamics and the sturdy community results of stETH. Conversely, its skeptics worry about the potential for centralization as a result of its rising affect—urging for Lido to self-limit its development—whereas additionally exploring options resembling embedding staking extra straight into the Ethereum community itself. Though the actuality of this case is extra nuanced and sure lies someplace in between this spectrum, it is evident {that a} stability between accessibility and decentralization is important to sustaining Ethereum’s core rules and long-term well being. 

Lido’s first mover benefit coupled with the introduction of native yields via stETH, its liquid staking token, has garnered massive community results for the protocol. These traits have resulted in a winner-takes-most dynamic, creating oligopolistic market construction round liquid staking. stETH is one of the most important items inside the Lido ecosystem, permitting customers/stakers to “delegate” their Ether to safe the community (take part in consensus) in change for a tokenized illustration—i.e., a spinoff—of their underlying stake. This token not solely presents a local kind of yield, but in addition unlocks extra utility as it may be traded, exchanged, borrowed in opposition to or used for liquidity functions whereas concurrently incomes staking yields—a key worth proposition of liquid staking. 

Supply: DeFi Balance Sheets

stETH and its wrapped model (wstETH) have grown to be the largest kind of collateral backing loans on a number of decentralized finance (DeFi) platforms and their iterations together with Aave, Maker and Compound. As illustrated above, the complete share of deposits on Aave v2 consists of 33% stETH, rising quickly since its introduction on the platform. Over the similar interval, wrapped ETH (WETH) noticed its share lower from a excessive of 39% to 21% at the moment. Its development is fueled by the yield and capital effectivity of stETH, which presents a chance price in comparison with holding or utilizing plain ETH. 

These properties have additionally led to an array of rising merchandise using stETH as a major collateral base for overcollateralized or synthetic stablecoins. These merchandise are complementary to others like sDai, sFrax and USDM, bringing yields from public securities, such asUS Treasuries, on-chain.  

Supply: Coin Metrics Market Data & Coin Metrics Labs

stETH additionally has a presence as a quote pair in secondary markets like decentralized and centralized exchanges, permitting customers to realize publicity to the token and its staking rewards. Moreover, having vital liquidity on automated market makers (AMM’s)—resembling Curve Finance & Uniswap—has helped facilitate liquid buying and selling of the asset. As seen above, stETH has traditionally benefited from its massive presence on Curve, with month-to-month buying and selling volumes peaking near $3.5B in Could 2022. Just lately although, this appears to be waning as Uniswap begins to seize extra liquidity and buying and selling quantity. Liquidity on centralized exchanges has typically been decrease compared, nonetheless, there appears to be an uptick on venues like OKX and Huobi.  

The stETH token follows a “rebasing” mechanism. This has essential implications for customers of Lido in addition to purposes that includes the stETH token. At a elementary degree, rebasing tokens like stETH are designed such that the token’s provide or a person’s stability of staked ETH will increase in proportion to the underlying asset. On this case, as a person provides ETH (underlying asset) to Lido, stETH (spinoff asset) will increase in tandem as staking rewards are earned. Subsequently, customers don’t have to make any accompanying transactions to see modifications mirrored of their staking stability.

Rebasing Perform:

balanceOf(account) = shares[account] * totalPooledEther / totalShares

The stETH rebasing operate could be visualized at a excessive degree as seen beneath. For instance, we are able to take into account 3 hypothetical accounts with preliminary staked quantities of 50, 30 and 20 ETH respectively. Each day, an oracle experiences every day stats from the Beacon Chain relating to the complete Ether pooled amongst validators. This complete enhance or lower (in the case of validators being slashed) in complete pooled Ether and accrued rewards are mirrored in a person’s account stability at the finish of every every day rebase—much like rising balances in a standard financial savings account. 

Though this ends in a user-friendly expertise, it implies that purposes that can’t assist rebasing tokens are required to onboard a non-rebasing model to allow compatibility. This has led to the introduction of the wrapped staked ETH token (wstETH) which options on a number of protocols like Maker, Aave v3, Compound v3 and Uniswap V3. 

As alluded to earlier, governance is a significant piece inside the Lido protocol. The Lido DAO, ruled by LDO token-holders, have “root” entry to sure crucial points of the protocol. This contains the means to make sensible contract upgrades, handle node and oracle operator registries, their related withdrawal keys and oversee the Lido treasury. These privileges and the extremely concentrated nature of LDO token holders are resulting in worries round the Lido governance layer as a possible assault vector. In consequence, proposals round dual-governance have been launched, permitting stETH holders to veto selections made by LDO holders with the goal of creating stability in the present energy dynamic.

Supply: Coin Metrics ATLAS & Tackle Tagging

The chart above illustrates the Herfindahl Hirschman Index (HHI) for LDO token holders. HHI measures the diploma of focus amongst market contributors in an trade, and on this case the focus of accounts holding LDO tokens. An HHI round 0 represents an excellent distribution, whereas HHI values near 1 showcase excessive centralization in distribution, with a small quantity of holders controlling a disproportionate quantity of provide. It’s evident that focus modifications considerably consequently of every day fluctuations in the holder base. Spikes in HHI above 1 are plausibly as a result of preliminary token allocations in December 2020 and main worth drops in LDO worth leading to the short-term will increase in focus. Nonetheless, over the long run there appears to be a reducing pattern in LDO token-holder focus, depicted in crimson—reducing from 0.6 in early 2021 to 0.3 as of October 2023.  


Lido is an important element of Ethereum—making its well being intently tied to that of the Ethereum community. Thus, there’s a robust incentive to maintain Lido safe. The present discourse round Lido and its prominence, due to this fact, represents a welcome growth for the evolution of Ethereum as a proof-of-stake (PoS) blockchain.  Whereas the path ahead could also be nuanced and never crystal clear, it showcases that stakeholders on both facet of the debate have the greatest pursuits of Ethereum in thoughts—aligning with its rules of accessibility and decentralization.

Supply: Coin Metrics Community Knowledge Professional

Bitcoin energetic addresses rose 3% whereas Ethereum energetic addresses declined 2% over the week. Day by day energetic Bitcoin addresses hit 1.14M on November fifth, the highest one-day complete since September fifteenth.

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